Negative Interest Rates Could Be Necessary To Protect Uk Economy, Says Bank Of England Chief Economist

[pipllman]

If I worked in a bank I wouldn't care if the loans went bad after I had got a couple of million in bonuses.

And there in is part of the problem

Incentives paid to sellers when the loan is written, not when it is repaid

Commissions paid to introducers when the loan is written, not when it is repaid

And, as the bank is likely to package up written mortgages and sell them (and derivatives thereof) on, the responsibility for making a good loan isn't so important as the need to actually make loans.

[Neverwhere]

Yes, both parties to the loan need to eat any losses arising

I would suggest that the lender structuring loans so that they are highly unlikely to lose out is exactly the asymmetrical responsibility I want to see. That would make qualifying for the loan harder and require the borrower to conduct more due diligence too. Overall result = lower risk of the taxpayer being looked to for a bail out if it goes wrong. Pipllman happy.

However, I see evidence to the contrary just now: lower qualifications needed for BTL loans, higher LTV, lower fees, more commission to introducers. If lenders really are making loans on the basis that their financial position is strong enough to suffer any losses arising from the loan book, then great. But I am not sure that is the case. I think lenders are pushing to lend as much as they can again and that the quality of the loan book (or derivatives based on it) is slipping as a result.

I'm not sure about quality slipping significantly for mainstream lenders (although possibly Nationwide, it's certainly dodgy that The Mortgage Works apparently allows second charges for equity finance) but I'd be interested if you have links to some relevant examples? Most of the slippage in underwriting standards I've seen has been associated with challenger banks, which is really neither here nor there as they are not too big too fail.

Lower fees and teaser rates also don't seem to be too important as long as other standards are maintained - they can always squeeze borrowers on SVRs later, or hike differentials as per West Brom - but I do agree that they look to be lending as much as they can into a sector that seems set to implode. It's just that as long as the BTLers in question have other assets or income then that implosion shouldn't trouble the mainstream lenders too much (obviously earlier lending to subprime BTL is another matter).

[pipllman]

I'm not sure about quality slipping significantly for mainstream lenders (although possibly Nationwide, it's certainly dodgy that The Mortgage Works apparently allows second charges for equity finance) but I'd be interested if you have links to some relevant examples? Most of the slippage in underwriting standards I've seen has been associated with challenger banks, which is really neither here nor there as they are not too big too fail.

Lower fees and teaser rates also don't seem to be too important as long as other standards are maintained - they can always squeeze borrowers on SVRs later, or hike differentials as per West Brom - but I do agree that they look to be lending as much as they can into a sector that seems set to implode. It's just that as long as the BTLers in question have other assets or income then that implosion shouldn't trouble the mainstream lenders too much (obviously earlier lending to subprime BTL is another matter).

I have posted links to Natwest and HSBC both explicitly chasing market share in BTL lending. Without seeing the loan book, it is merely my conjecture that loan quality is slipping. I have seen (and linked to evidence) that loan quality on automobile lending in the US has significantly slipped in the last 12 months. I doubt that is isolated

Unless and until the £375bn QE finds its way back to the central bank (it won't, ever, of course) then it is a proportion of the money being used to lend. FLS - another pot that will unlikely ever be repaid has, to all intents and purposes, gone straight to BTL loans. With money so easy to come by for so long for banks and the return of the appetite for MBS type products in the market, I would say that it is inevitable that the loan book quality will slip. Maybe not as much as it did before.

[Neverwhere]

I have posted links to Natwest and HSBC both explicitly chasing market share in BTL lending. Without seeing the loan book, it is merely my conjecture that loan quality is slipping. I have seen (and linked to evidence) that loan quality on automobile lending in the US has significantly slipped in the last 12 months. I doubt that is isolated

Unless and until the £375bn QE finds its way back to the central bank (it won't, ever, of course) then it is a proportion of the money being used to lend. FLS - another pot that will unlikely ever be repaid has, to all intents and purposes, gone straight to BTL loans. With money so easy to come by for so long for banks and the return of the appetite for MBS type products in the market, I would say that it is inevitable that the loan book quality will slip. Maybe not as much as it did before.

Chasing market share is not the same as chasing low quality market share. Everyone is chasing super prime buy-to-let at the moment because it's a great buffer. House prices can crash substantially over 25% with no loss to the lender because on small portfolio sizes the buy-to-letter's own home and other income are in the mix. There's no declaring bankruptcy for people who can actually pay their debts and ran them up gambling in an unregulated investors market.

[pipllman]

Chasing market share is not the same as chasing low quality market share. Everyone is chasing super prime buy-to-let at the moment because it's a great buffer. House prices can crash substantially over 25% with no loss to the lender because on small portfolio sizes the buy-to-letter's own home and other income are in the mix. There's no declaring bankruptcy for people who can actually pay their debts and ran them up gambling in an unregulated investors market.

Time will tell. I think there is no smoke without fire: lower rates, more commission for introducers etc. all signs that lenders are pushing to lend more money. In an environment with a low number of transactions, that can easily lead to everyone involved looking for a way to make the loan happen. That can lead to lower quality loans getting onto the book.

[Guest_growlers_*]

Time will tell. I think there is no smoke without fire: lower rates, more commission for introducers etc. all signs that lenders are pushing to lend more money. In an environment with a low number of transactions, that can easily lead to everyone involved looking for a way to make the loan happen. That can lead to lower quality loans getting onto the book.

Possibly but whilst easy credit has been the driver of the bubble so far, It don't think it follow that further easing will lead to higher prices.

Edited September 20, 2015 by growlers

[Neverwhere]

Time will tell. I think there is no smoke without fire: lower rates, more commission for introducers etc. all signs that lenders are pushing to lend more money. In an environment with a low number of transactions, that can easily lead to everyone involved looking for a way to make the loan happen. That can lead to lower quality loans getting onto the book.

We'll see. Lending into an unregulated market can significantly shore up the lender's position given the lack of protection for the borrower. Either way I very much doubt that the current bail-in structures will be less than adequate, especially with UKAR waiting in the wings.

[pipllman]

We'll see. Lending into an unregulated market can significantly shore up the lender's position given the lack of protection for the borrower. Either way I very much doubt that the current bail-in structures will be less than adequate, especially with UKAR waiting in the wings.

If it gets to the point where UKAR has to take on a single mortgage, I would judge that as a fail. A fail of everyone involved to learn anything from the last crisis except 'the taxpayer will bail us out'

Not good.

Only time will tell.

[Venger]

Maybe the banks have been strengthening - they surely should have done over the last 7 years or so

However, until the moment comes, we can only make a best guess based on the publicly available information

I am not convinced that they all have been as prudent as they would have us believe.

I see things like Paragon offering a retail saving bond with a 6% coupon, when every mortgage they offer on their product list has an APR of 5.7% or less (right down to 4.3% in fact) and I think WTAF is going on there?

Just as some borrowers have ignored the opportunity to get to grips with their situation, I really won't be surprised if some lenders have too

I think some have taken risks with their share of the QE pot that might have big downsides, as well as big upsides

I also think that packaging up and selling of mortgages - to reduce a lender's risk - has remained a big part of the lenders' business models. Quite how that ends up unravelling also remains to be seen.

Moreover, the longer low interest rates and QE monies persist in the system, the more they will get used to that world. Pulling them off the teat of the taxpayer gets harder...

You are correct that I am not calling for BTL to be regulated to the same extent as OO is via MMR (which I think should be stopped too): banks should be free to lend as they wish, with minimal interference by government and, if they go so far as to go skint, then skint they should go. Only retail deposits should be guaranteed by the government.

Lenders and borrowers should stand or fall on the deals they do. In almost all cases, that puts the onus on the lender to be the professional in the situation and to be responsible for making the decision to lend, or not.

Savers too. The system can handle HPC. The BTLers still heading into it may be there, to be gouged. Same for the funders/6%ers, perhaps.

Although 6 per cent is a better rate than you can get from a savings account, people should always tread with care when buying company debt via bonds like this, because the money you make back depends on the firm not going bust.

http://www.thisismoney.co.uk/money/investing/article-3193576/Paragon-offers-savers-6-return-retail-bond.html

[...]Part of the reason that challenger banks like Paragon can suck up market share is because the large lending institutions are in the main leaving the really high risk, subprime borrowers to them. Noone cares what happens to Paragon. They can go bust and get rolled into UKAR easy as, it's not likely to cause any wider problems to the economy.

Borrowers may have gotten bailed out in the past, but only because the lenders involved couldn't handle their sides of the losses and were deemed to be too big to fail. This doesn't seem to be the case any more but if it is then the BoE don't have anywhere to go on rates - which is why they're discussing NIRP despite the likely unpalatable socio-political consequences - and so the degree to which they could directly bail out borrowers is limited.

Buy-to-let is a business to business loan, both sides are expected to be professional. If buy-to-letters haven't been professional than they need to eat their losses.

If lenders have found a way to structure buy-to-let loans that means that the lender is highly unlikely to lose out at all but the buy-to-letter is very vulnerable to losing everything - and the mainstream lenders appear to have done this - and thereby helped protect themselves from the need for further bailouts then they have done all of the due diligence that they need to do.

Buy-to-let is currently an unregulated market and therefore there is no asymmetrical responsibility weighted towards the behaviour of the lender because asymmetrical responsibility can only be enforced by regulation. If buy-to-let lending were not an unregulated market then I strongly suspect that it would not exist at all as its current modus operandi is to arbitrage the difference between what a landlord can borrow against their tenant's income (in the form of rent) in an unregulated market against what their tenant can borrow against their own income in a regulated market (for owner occupation).

Lenders are perfectly within their rights to gouge buy-to-letters as much as they can, especially if it strengthens their overall financial position.

[Neverwhere]

If it gets to the point where UKAR has to take on a single mortgage, I would judge that as a fail. A fail of everyone involved to learn anything from the last crisis except 'the taxpayer will bail us out'

Not good.

Only time will tell.

The fact that UKAR is already set up and can take on mortgages and facilitate the orderly winding down of mortgage books is one of the things that makes it a lot easier to allow lenders to go bust. If lenders are allowed to go bust in such a fashion then that's a win in my book, although I do think that UKAR should be more proactive in getting rid of said loans once it has them (not saying that they're not proactive already, I just think that a lot of the BTL loans include T&Cs which could allow them to push this further).

[pipllman]

I care what happens to paragon. I don't want it to easily get rolled into UKAR

If its loans go bad, I want its borrowers, shareholders, directors, employees and advisors (valuers, rating agencies etc.) pursued for the losses on the loans they wrote.

I don't want to contribute (via UKAR or any other taxpayer funded solution) to those bad loans just because I happen to live in the UK.

[R K]

In 2005 Haldane assumed responsibility for the Systemic Risk Assessment Division within the Financial Stability department. In 2009 he became the Bank of England's Executive Director of Financial Stability.^[1][3] Haldane has been widely cited as a leading Bank of England expert on Financial Stability

Ive decided Haldane is a troll. Supposedly the smartest tool in the BOE box, but didnt even notice RBS was 5 times the size of the UK economy and had virtually no capital when he was responsible for the risibly named Systemic Risk Assessment Division.

Feted around the world as a "genius" - Personally I think hes an over-paid wonk better suited to a Professorship or think tank and kept well away from executive responsibility. Should have been sacked over RBS & BOS not promoted.

[Neverwhere]

I care what happens to paragon. I don't want it to easily get rolled into UKAR

If its loans go bad, I want its borrowers, shareholders, directors, employees and advisors (valuers, rating agencies etc.) pursued for the losses on the loans they wrote.

I don't want to contribute (via UKAR or any other taxpayer funded solution) to those bad loans just because I happen to live in the UK.

There's no reason a lender getting rolled into UKAR would involve taxpayers picking up the tab for any losses they're experiencing. Everyone can eat their losses as appropriate and UKAR can just make sure that they do so in an orderly fashion, including covering their own operating costs.

Anyway, I think we've wandered considerably off topic for this thread (#^.^#) so I'm going to leave it there.

[pipllman]

Until UKAR is full wound up, we don't know if the taxpayer will have a bill from it or not.

But you are right about wandering off topic, we have derailed the thread

Back to

Negative Interest Rates Could Be Necessary To Protect Uk Economy, Says Bank Of England Chief Economist

I think RK is right about Haldane

[Si1]

Ive decided Haldane is a troll. Supposedly the smartest tool in the BOE box, but didnt even notice RBS was 5 times the size of the UK economy and had virtually no capital when he was responsible for the risibly named Systemic Risk Assessment Division.

Feted around the world as a "genius" - Personally I think hes an over-paid wonk better suited to a Professorship or think tank and kept well away from executive responsibility. Should have been sacked over RBS & BOS not promoted.

After a master's degree he's only ever worked for the boe, implies there's not a lot to him and not a lot of varied experience.

[Si1]

An alternative missive, from Roger Bootle, who says that the connection between a weak economy and low interest rates is not the only driver for interest rates and only entered orthodoxy with Alan Greenspan. And that owing to capital misallocation, interest rates need to nudge up

http://www.telegraph.co.uk/finance/comment/11847996/The-Fed-needs-to-break-us-in-gently-with-its-first-interest-rate-rise-now.html

"For all those who have suffered from the gross distortion of near-zero interest rates, this change cannot happen a moment too soon."

[interestrateripoff]

After a master's degree he's only ever worked for the boe, implies there's not a lot to him and not a lot of varied experience.

Just goes to show you don't need a PhD to develop economic policy....

http://time.com/70833/

And voted one of the top 100 leaders in 2014.

[Si1]

Just goes to show you don't need a PhD to develop economic policy....

http://time.com/70833/

And voted one of the top 100 leaders in 2014.

He's never actually been tested independently, either in academia or industry. Never had direct accountability for his ideas.

He may simply be good at boe and treasury office politics. Plenty of that happens.

Edited September 20, 2015 by Si1

[frederico]

Once you base your economic growth on expanding credit forever while suppressing wages, you have had it.

[scepticus]

Ive decided Haldane is a troll. Supposedly the smartest tool in the BOE box, but didnt even notice RBS was 5 times the size of the UK economy and had virtually no capital when he was responsible for the risibly named Systemic Risk Assessment Division.

Feted around the world as a "genius" - Personally I think hes an over-paid wonk better suited to a Professorship or think tank and kept well away from executive responsibility. Should have been sacked over RBS & BOS not promoted.

Well that's a rather sudden volte-face. For quite some time now you have been quoting his work in support of various of your other arguments, so I would say that if you have decided that he's a bad-un, you have made a rather big mistake. I mean, his record with the RBS saga is not something you brought up much when you were linked to his articles as supporting material. In fact, IIRC, you basically ignored that.

Mistakes are how people learn. Start-up culture - you know that thing which produced Google among others, is supposed to be about experience gained from mistakes. Easy to throw stones at obvious targets - so many hacks opining about how things would have been different if they - or their chosen boobs, were in charge at the time! But we'll never know will we - so they present un-testable hypotheses as some kind of revealed truth.

Seems to me the issue here is that he has eventually floated an idea you don't like and which has caused, dare I say it, somewhat of a Daily Mail reaction on your part. Still, you won't be the only one - various Torygraph hacks have been supportive of Haldane in the past and now the knives are out because he said something that doesn't fit with the programme. I find it all a bit depressing, peoples values are so fickle.

I also find the notion of attacking the man (e.g. his academic background) rather than the ideas, distasteful - just like I find the idiotic Telegraph/Mail Corbyn scare-mongering repulsive. And you attack him from a very precarious and frankly not credible, position; having previously been an adherent.

That said, if he thinks negative interest rates are going to be a nice way of meeting the inflation target then I would agree he is somewhat off the mark. I think many of these wonks do need to think a bit harder about how all this (and the alternatives) would actually work, but the discussion needs to begin somewhere.

Why not try criticising the actual substance of what he said?

[R K]

Well that's a rather sudden volte-face. For quite some time now you have been quoting his work in support of various of your other arguments, so I would say that if you have decided that he's a bad-un, you have made a rather big mistake. I mean, his record with the RBS saga is not something you brought up much when you were linked to his articles as supporting material. In fact, IIRC, you basically ignored that.

Mistakes are how people learn. Start-up culture - you know that thing which produced Google among others, is supposed to be about experience gained from mistakes. Easy to throw stones at obvious targets - so many hacks opining about how things would have been different if they - or their chosen boobs, were in charge at the time! But we'll never know will we - so they present un-testable hypotheses as some kind of revealed truth.

Seems to me the issue here is that he has eventually floated an idea you don't like and which has caused, dare I say it, somewhat of a Daily Mail reaction on your part. Still, you won't be the only one - various Torygraph hacks have been supportive of Haldane in the past and now the knives are out because he said something that doesn't fit with the programme. I find it all a bit depressing, peoples values are so fickle.

I also find the notion of attacking the man (e.g. his academic background) rather than the ideas, distasteful - just like I find the idiotic Telegraph/Mail Corbyn scare-mongering repulsive. And you attack him from a very precarious and frankly not credible, position; having previously been an adherent.

That said, if he thinks negative interest rates are going to be a nice way of meeting the inflation target then I would agree he is somewhat off the mark. I think many of these wonks do need to think a bit harder about how all this (and the alternatives) would actually work, but the discussion needs to begin somewhere.

Why not try criticising the actual substance of what he said?

Im not being drawn into your (rather contradictory, adhom & trolling) frame Sceppy. Sorry matey.

The substance of what he said is ridiculous. how easy do you think it is for a hedge fund/asset manager to withdraw £billions in cash from a bank & how easy do you think it would be to prevent them doing so without preventing the remaining 99.99999% of the population who dont have more than a few grand anyway from doing so?

Come on, this is pretty simple stuff.

[interestrateripoff]

He's never actually been tested independently, either in academia or industry. Never had direct accountability for his ideas.

He may simply be good at boe and treasury office politics. Plenty of that happens.

Bernanke published quite a bit in academia, but that didn't help either.

Barnett 2012 Getting it Wrong: How Faulty Monetary Statistics Undermine the Fed, the Financial System, and the Economy.

There's an interesting opening in this where he talks about being in the meetings prior to Greenspan being put in charge and he states the Profs wouldn't venture outside their speciality whereas Greenspan offered an opinion on everything. Being specialised is useful but the fear of being wrong stops robust discussion.

If you are going to talk about negative rates I think they need to be far more honest about what they think might happen, the trouble is that is likely to generate a discussion about what money is etc... which they clearly want to avoid.

[interestrateripoff]

http://www.bankofengland.co.uk/publications/Documents/speeches/2015/speech797.pdf

By 2014, what do we find? Due to the magic of compound interest, China is now almost eight times the size of Italy. Indeed, China creates a new economy the size of Italy every 18 months; an economy the size of Portugal every quarter; an economy the size of Greece every month; and an economy the size of Cyprus every week. Those things that can be counted sometimes really do count.

[interestrateripoff]

http://www.bankofengland.co.uk/publications/Documents/speeches/2015/speech840.pdf

The need for unconventional measures arose from a technological constraint – the inability to set negative interest rates on currency. It is possible to set negative rates on bank reserves – indeed, a number of countries recently have done so. But without the ability to do so on currency, there is an incentive to switch to currency whenever interest rates on reserves turn negative. That hinders the effectiveness of monetary policy and is known as the Zero Lower Bound – or ZLB – problem (Ball (2014)).

From the speech, he's assuming that if you have a negative rate people won't save in that currency. This is ignoring the context, if you fear losing more in currency X than the negative currency the logical reaction is to save in the currency with a negative rate over losing money with a currency with high inflation and a devaluing currency.

[scepticus]

Im not being drawn into your (rather contradictory, adhom & trolling) frame Sceppy. Sorry matey.

The substance of what he said is ridiculous. how easy do you think it is for a hedge fund/asset manager to withdraw £billions in cash from a bank & how easy do you think it would be to prevent them doing so without preventing the remaining 99.99999% of the population who dont have more than a few grand anyway from doing so?

Come on, this is pretty simple stuff.

Well at least now the actual idea is being discussed rather than ad homs on the idea's originator (which in any case, he isn't). Note quite sure exactly which bit of the text of proposal you refer to above - so why not paste it then I can give my own view (and others can too) on it?

I do recall when I first seriously floated the NIRP concept and associated predictions here on HPC (not that I am claiming to be the idea's originator either, FTAOD) I was subject to plenty of ad-hom as a result (along the lines of 'your mad, it'll never happen).

Yet here we are...